John Keells Holdings PLC (JKH)
Event Update
Plans unveiled on Integrated Resort JKH in a circular to shareholders unveiled its plans on the Integrated Resort project. The project is estimated to cost over USD650m (over LKR 84.5b) and considering the scale and the importance of the project to the country, it has been approved as a Strategic Development Project by the Board of Investment of Sri Lanka (BOI). As the expected investment on the project is more than 50% of JKH’s asset base as of end June 2013, the project is considered to be a ‘Major Transaction’ and JKH is seeking shareholder approval by way of a special resolution. The project is to be constructed in the Justice Akbar Mawatha and Glennie Street Properties (owned by JKH subsidiaries) bordering the Beira Lake. Total built up area of the project will be 4.5m sq.ft. and will include the following. Projects within the integrated resort Project
Size/ description
Phase 1 5-star luxury hotel
800 rooms
Convention centre
Capacity to hold 2500 guest at a time
Shopping mall Entertainment and gaming facility Luxury condominiums
400,000 sq ft of built up area 150,000 sq ft with access to hotel and retail facilities 240 luxury residential condominims
Car Park facility
2,500 slots
Phase 2 Serviced apartments/ Condominiums
200 units
Office complex
400,000 sq ft
Source: JKH circular to shareholders released on 02 August 2013
Phase 1 is expected to take 5 years to complete and Phase 2 another 3 years according to the circular. However, it should be noted that JKH may undertake Phase 2 subject to and based on prevalent market conditions at that time. JKH will have effective control of 96.70% of the project company.
Tax concessions The project is to receive the following tax concessions under the Strategic Development Projects Act.
Income tax on profits Income from non-gaming activities would be exempted from income tax for a period of ten years. Tax exemption period will commence on the first year the company reports a taxable profit or three years after the commencement of operations whichever is earlier. After the ten years of tax exemption, the profits would be taxed at a lower of 6% or at half the rate at which the hotel industry is taxed at that time, for a period of 15 years.
Thushanthi James thushanthi.james@candorh.com
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Income tax on dividends Tax on dividends from the exempted profits mentioned above will also be exempted for the same 10 year period and one year thereafter.
Withholding tax The project company is exempted from paying withholding tax on interest paid on foreign loans, debt obtained for capital expenditure and on technical fees. Further exemptions may be given subject to certain conditions.
PAYE tax A maximum of 20 expat staff shall be exempt from PAYE tax for a period of 5 years from the date of commencement of commercial operations.
VAT, Port and Airport Development Levy, Construction Industry Guarantee Fund Levy and Customs duty The project company will receive exemptions from these taxes as well.
Funding The project is expected to cost approximately USD820m with Phase 1 of the project taking a minimum investment of USD650m. Funding requirement and sources of funding Project USD m
LKR m
Phase 1
650
84,500
Phase 2
170
22,100
Total investment
820
106,600
Initial Investment Land (owned by JKH subsidiaries) Equity by JKH Debt at the project company
60 7,800 240 31,200 not disclosed
Source: JKH circular to shareholders released on 02 August 2013 Exchange rate assumed LKR130/USD
JKH is planning to fund its equity requirement through existing cash reserves and a combination of debt and equity. At end June 2013, JKH had cash and cash equivalents close to LKR 19b. If JKH utilises these cash balances fully, it may have to raise another LKR12.2b from debt and equity to fund the initial investment. The circular further states that the Project Company would have a debt-to-equity ratio of 60:40 at peak levels of funding. In that case, debt should account to c. USD490m of total investment. Considering that JKH and its subsidiaries are injecting USD300m equity as initial investment, the project may get another USD30m as equity perhaps from an international party.
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JKH’s integrated project is value accretive to the JKH Group It is rumoured that JKH is tying up with a large and well known player in the industry for the operation of the integrated resort. We too believe that JKH would tie up with one of the best in the industry considering JKH’s past investment track record. A strategic tie up should help JKH to fast track its resort operations by tapping into the international database of its partner. While shareholders cannot expect immediate returns from the project as this is a medium term project, we believe that returns would be very lucrative once the resort is in operation. Considering the lucrative EBITDA margins the Asian resorts enjoy (35% -40%), we believe that JKH’s profitability too would increase and that JKH would divest certain low-margin businesses increasing its return on invested capital (ROIC). A point to note is that integrated resort model is much more profitable compared to conventional hotel operations as visitors tend to stay long and therefore spend more on gaming, shopping, food and beverages in addition to accommodation. Further the gaming tax imposed by the Sri Lankan government is very low at 5% compared to the taxes of Singapore (5%-15%), Malaysia (25%) and Macau (39%).
Valuation Assuming the integrated resort starts commercial operations by 2020, and that there will be no further investment into the project other than those stated in the report, we arrive at a valuation of LKR365.0 per share for JKH and hence recommend JKH as a long-term strategic BUY. We ascribed only 50% of the project valuation to our target price due to lack of visibility of project details. Our valuations assumptions include, •
•
A 30% ROIC for the project. Considering the very high ROIC levels enjoyed by industry players (25%-40%) and on the back of considerable tax incentives, we believe that an ROIC of 30% is easily achievable. A 12.9% WACC on the project.
Major risks and concerns for the valuation are, change of government policy regarding integrated resorts that may affect the project adversely, political and economic instability, weakening of the rupee and other factors that may result in unexpected cost increases. A full report for JKH will follow once further details are available on the project.
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Annexure
A brief look at integrated resorts in South East Asia The integrated resort concept has become quite popular in Macau, Malaysia and Singapore in the past decade. We think it’s worthwhile to have an understanding of these markets especially as Sri Lanka has taken steps to promote integrated resorts in the country.
Malaysia Malaysia is a popular tourist destination and received 25.03m tourists in 2012. Receipts from tourism for 2012 was c. USD19.8b. At end 2012 Malaysia had 195,445 hotel rooms and an average occupancy rate of 62.4%. Resort World Genting, situated in the middle of a 130 million year old rainforest and at 6,118 feet above sea level, is the only mixed-used resort that offers gaming facilities in Malaysia.
Resorts World Genting Resort World Genting is an integrated resort offering leisure and entertainment facilities and received over 20 million visitors annually in the last two years. The resort has six hotels with 8,000 rooms, convention facilities, 200 dining and retail outlets and gaming and entertainment facilities including a casino and a theme park. Operated by Genting Malaysia Berhad, Casino de Genting is the only legal land based casino in Malaysia. Genting Malaysia also has gaming operations in Singapore, the U.K and the U.S.
An aerial view of Resorts World Genting Source: Company Presentation
Malaysia's Resorts World Genting - some key facts Performance indicators Revenue (USDm) EBITDA (USDm) EBITDA margin
2011 1,705 663 39%
2012 1,795 668 37%
Hotel room statistics Room nights sold ('000) Average occupancy Average room rates USD Day trippers: hotel guests
2,720 94% 26 72 :28
2,795 95% 27 73: 27
Source: Corporate Presentation on Genting Malaysia June 2013
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Singapore Singapore has two integrated resorts namely Resorts World Sentosa which is part of Genting Malaysia and Marina Bay Sands owned by Las Vegas Sands. Singapore received 13.2m and 14.4m international visitors in 2011 and 2012 respectively. Tourism income for 2012 is estimated to have been c. USD23b while gaming revenue amounted to USD5.85b. Entrance to casinos is free for foreigners while Singaporeans have to pay and entry fee of S$100.
Resorts World Sentosa Resort World Sentosa is Singapore’s first integrated resort that commenced operations in 2010. The S$6.59b resort spans 49 hectares and brings together a Universal Studio theme park, the world’s largest oceanarium, six hotels, the Resorts World Casino, a convention centre, retail outlets and world class restaurants.
Source: http://www.michaelgraves.com/architecture/project/resorts-world-at-sentosa.html
Resorts World Casino is the first casino in Singapore and was officially opened on 14 February 2010. The casino offers table games, electronic table games and slot machines. The casino offers different kinds of memberships to its patrons and also offers a variety of entertainment and dining facilities.
Marina Bay Sands Marina Bay Sands is a mixed-use integrated resort housing a 2,560-room hotel, theatres, the Marina Bay Sands Casino, a convention centre and dining and shopping facilities. The three 55-storey hotel towers are connected at the top by the Sands Sky Park that can host up to 3,900 people. The sky park has an infinity swimming pool, restaurants, lounges and an observatory. Marina Bay Sands had its official opening in June 2010. Marina Bay Sands Casino is the world’s largest atrium-style casino featuring four levels of gaming and entertainment in one space totalling 15,000 square meters. The casino offers popular table games, electronic table games and slot machines. The upper two levels of the casino have 30 private rooms and provide VIP members access to special gaming and dining privileges.
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Source: Company Presentation
It is interesting to note that Marina Bay Sands derived over 75% of its revenue from gaming activities in 2011 and 2012. Marina Bay Sands Revenue (USDm) Casino revenue Room revenue Mall revenue Other Total Revenues Hotel room statistics Occupancy rate Average daily room rate USD Revenue per available room Mall statistics Mall gross leasable ares sq ft Occupancy rate Base rent per sq ft USD Tenant sales per sq ft USD
2011 2,365 268 138 151 2,922
2012 2,272 325 156 132 2,886
94% 311 291
99% 355 351
629,428 95% 186 1,231
637,981 96% 215 1,393
Source: Las Vegas Sands Annual Report 2012
Macao Macao has some of the largest integrated resorts in the world and is also the largest gaming market in the world. Macao attracted over 28 million visitors in 2012 and also earned USD38.2b in gaming revenue for the year. At end 2012, Macao had a total of 35 casinos with 23 of them located in the Macao Peninsula and the other 12 in Taipa Island.
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Proposed integrated resorts in Sri Lanka The government of Sri Lanka has identified the importance of tourism to the economic growth and is taking various measures to increase the attractiveness of the country for tourists. Approving integrated resorts and supporting these developments through tax concessions and other numerous benefits for owners is one such step. Apart from the JKH integrated resort mentioned earlier, the Sri Lankan government has granted approval for another integrated resort to be constructed in the heart of Colombo. The project is a joint venture between Rank Holdings and Australia’s Crown Group. The Crown project is planned as a 36-storey entertainment complex with a 400-room hotel, a casino and other amenities and is expected to cost USD350m. The two parties are yet to announce further details of the project.
Lessons for Sri Lanka We believe that Singapore is the best comparable market for Sri Lanka and that Sri Lanka can learn valuable lessons from Singapore’s experience. Singapore’s integrated resorts achieved record revenues in their first years of operations and high occupancy levels at hotels. During 2012 Singapore earned USD5.85b in gaming revenue. However the revenue growth is slightly tapering off with the loss novelty as well as global economic downturn. The imposition of stringent rules for locals has also added to the slowing growth. The reasons for Singapore’s success can be attributed to the following; •
Proximity to major cities in Asia and its unrivalled transportation infrastructure Major source markets for tourism in Singapore are China and Indonesia. Furthermore, Singapore is one of the best connected countries with over 110 airlines operating from Changi Airport flying to more than 240 cities in 60 countries.
•
Singapore’s positioning as one of the best financial hubs in Asia Singapore not only attracts the leisure traveller but the business traveller too by offering convention and exhibition facilities. According to the International Congress and Convention Associations’ (ICAA) rankings, Singapore is the only Asian city among the top ten convention cities in the world. During 2012 Singapore had hosted 150 ICAA events.
•
Availability of many tourist attractions Singapore offers world class leisure and entertainment facilities, international shopping malls and many other attractions for tourists. New and upcoming attractions include the Singapore Sports Hub that will house a 55,000 capacity National Stadium with a retractable roof and the National Art Gallery. We believe that Sri Lanka has to take a quantum leap in improving the infrastructure and attractiveness of the country as an entertainment/ tourist destination in order to compete with the likes of Singapore, Malaysia and Macao.
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Size comparison of the proposed JKH resort with Singaporean resorts Marina Bay Resorts World JKH integrated Sands Sentosa resort Size Total Area sq ft '000
9,096
5,274
4,500
Casino area sq ft '000
162
162
150
Mall area sq ft '000
638
30
400
2,560
1,500+
1,240*
5.7
5.5
0.8
Total hotel rooms Total invesment USD b
Source: JKH circular to shareholders released on 02 August 2013, Company reports and Candor * Number of rooms for JKH include 800 hotel rooms and the condominium units
Proximity to major markets is a definite plus for Sri Lanka Sri Lanka benefits from being just one-hour flight away from India. India is already a major source market of visitors for Sri Lanka and we believe that integrated resorts would attract more Indians to Sri Lanka, as India’s gaming industry is limited to a few small players in the provinces of Sikkim and Goa. Post-war Sri Lanka is also witnessing rapid growth in tourist arrivals from China and the Middle East. We believe that these two markets too would contribute significantly to the integrated resort market in Sri Lanka.
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Level 8, Millennium House 46/58, Nawam Mawatha, Colombo 2, Sri Lanka T +94 11 235 9100 F +94 11 230 5522 www.candor-holdings.com
Research
Sales
Mohamed Intikab intikab.mohamed@candorh.com 112 359 132
Mohammed Riyas mohammed.riyas@candorh.com 112 359 102
Thushanthi Mariyan James thushanthi.james@candorh.com 112 359 133
Lasantha Jinadasa lasantha.jinadasa@candorh.com 112 359 111
Usama Jiffry usama.jiffry@candorh.com 112 359 135
Vishvajith Nayakarathne vishwajith.nayakaratne@candorh.com 112 359 112
Aadhil Iqbal aadhil.iqbal@candorh.com 112 359 138
Damayanthi Madawalage damayanthi.madawalage@candorh.com 112 359 114 Senaka Weerasekera senaka.weerasekera@candorh.com 112 359 119 Manjula Yapa manjula.yapa@candorh.com 112 359 108
Disclaimer: The report has been prepared by Candor Equities Limited (CEL). The information and opinions contained herein are based upon information obtained from sources believed to be reliable and made in good faith. Such information has not been independently verified and no guarantee, representation or warranty, express or implied is made as to their accuracy, completeness or correctness. All such information and opinions are subject to change without notice. This document is for information purposes only, and the description of any company or their securities mentioned herein is not intended to be complete and this document is not, and should not be construed as, an offer, or solicitation of an offer, to buy or sell any securities or other financial instruments.
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